January 22, 1992
TO: CLOSED-END FUND MEMBERS NO. 6-92
OPERATIONS MEMBERS NO. 4-92
SEC RULES MEMBERS NO. 3-92
UNIT INVESTMENT TRUST MEMBERS NO. 5-92
ACCOUNTING/TREASURERS MEMBERS NO. 5-92
RE: SEC STAFF ISSUES THIRD GENERIC COMMENT LETTER
__________________________________________________________
The Division of Investment Management issued the attached
letter to the investment company industry to provide guidance on
the filing of registration statements and post-effective
amendments in 1992. The letter covers disclosure developments
since the last "generic comment letter", dated January 3, 1991.
The contents of the letter are summarized below; however, please
refer to the letter for more complete discussion of the staff's
views.
I. Filing Requirements
A. Filing Fee Increase
The letter reminds registrants that 1933 Act registration
fees have been increased to 1/32 of 1% of the maximum aggregate
price at which the securities will be offered.
B. Rule 24f-2 Requirements
The letter reminds registrants that the fee offset from the
"netting" of redemptions can only be used if the 24f-2 Notice is
received by the Commission within two months (not 60 days) after
the close of the registrant's fiscal year.
C. Combined Prospectuses
The staff states that it is permissible to use combined
prospectuses for funds that are registered separately under the
1940 Act. Since the funds are registered separately, each fund
must file with the Commission a separate registration statement.
The staff requires that registrants using a combined prospectus
should include a statement that there is the possibility that one
fund may be liable for any misstatements, inaccuracy, or
incomplete disclosure in the prospectus concerning the other
fund.
D. Form N-14 and Rule 488
The staff advises that while registrants filing
registration statements on Form N-14 may elect to use Rule 488
under the 1933 Act to designate an automatic effective date
(thirty to fifty days after filing), they should make sure that
the registration statement is complete and accurate before filing
under that Rule. Otherwise, the registrant will be required to
file a pre-effective amendment to delay the effective date.
Therefore, if the items required by Form N-14 are not available
at the time of initial filing or extensive disclosure revisions
are anticipated, registrants should file under Rule 473 instead
of under Rule 488.
E. Omission of Adviser's Balance Sheet
Unless the advisory agreement is being voted on for the
first time and absent special circumstances, the letter states
that an investment adviser's balance sheet may be omitted from
proxy statements under Rule 20-2(a)(9) under the 1940 Act if the
adviser's gross revenue from all services performed for
registered investment companies is less than 20% of the adviser's
gross revenues.
F. Proxy Comments
The staff clarifies that registrants may print and mail
proxies without first receiving any comments from the staff if
the preliminary proxy statement has been on file with the
Commission for ten calendar days. If the staff intends to
comment on the preliminary proxy, the registrant will, before the
end of tenth day, be provided the comments or alerted that
comments are forthcoming.
II. Disclosure Comments
A. Index Funds
An investment company or series that uses the word "index"
in its name should be substantially invested in securities of the
underlying index and should have a policy of weighing its
portfolio to approximate the relative composition of the
securities contained in the underlying index. In addition,
disclosure should be made with respect to: (1) the standard used
to track the accuracy with the index (e.g., what correlation
coefficient is used); (2) how tracking will be monitored; and (3)
what steps will be taken if tracking accuracy is not maintained.
B. Money Market Fund Disclosure
The letter states that the prospectus cover page disclosure
required under Item 1(a)(vi) of Form N-1A for funds holding
themselves out as money market funds must appear together and in
the order designated. The staff clarifies that the statement
will be prominent if it appears in some typographically
distinctive manner (e.g., boldface, italics, red letters, etc.).
C. Third Party Fees
Registrants are required to add a footnote to the fee table
where customers of banks and other financial institutions must
pay fees for services in order to purchase shares of an
investment company offered exclusively by that entity, even
though such services may not be fund related. Where only one
institution is imposing the additional fee (e.g., where the
shares are offered through a cash management account), or where
the fund is designed to be offered primarily by a fund affiliate
which charges an additional fee, the fee should be included as an
item in the fee table.
D. Exculpatory Language Concerning Telephone Transactions
The staff is currently considering the legality of the
disclaimer found in some fund prospectuses and application forms
that the registrant or transfer agent will not be liable for
following instructions for telephone exchanges or redemption
transactions that prove to be fraudulent and will not be
responsible for verifying the authenticity of instructions.
Until this issue is resolved, registrants that provide for such
disclaimers must include the following disclosure in their
prospectuses:
(1) a clear description of the registrant's policy
with respect to exculpation from liability in the
event of a fraudulent telephone exchange or
redemption transaction;
(2) a statement that the investor, as a result of
this policy, will bear the risk of loss;
(3) a statement that the staff of the SEC is
currently considering the propriety of such a
policy.
E. Investment Policies and Rule 144A
Funds that have fundamental policies prohibiting them from
investing in restricted securities or securities subject to legal
or contractual restrictions on resale must change their policies
before investing in Rule 144A securities. In addition, the staff
reminds funds that in determining the liquidity of Rule 144A
securities, the board must consider the trading markets for that
specific security. In addition, the staff states that the board
is not required to approve and review each Rule 144A security
purchased by the fund. Instead, the board is responsible for
developing and establishing procedures for determining liquidity
and monitoring the adviser's implementation of them.
F. Segregated Accounts
The staff reiterates its view that when a fund establishes
a segregated account, as it is required to do if it is engaging
in certain transactions, the account must be maintained with the
fund's custodian and contain only liquid assets, such as cash,
U.S. Government securities, or other liquid high grade debt
obligations. Equity securities cannot be used for these
purposes. In addition, the fund is required to disclose in its
statement of additional information the kinds of assets that will
be placed in the segregated account and the fact that the
segregated account will be maintained by a custodian.
III. Recent Revisions of Staff Positions
A. Section 12(d) and CMOs
The letter discusses a recent no-action letter issued by
the staff in which it liberalized its position regarding the
application of the limitations of Section 12(d)(1) on issuers of
collateralized mortgage obligations (CMOs) that have received
exemptive orders under Section 6(c) of the 1940. ( The Blackstone
Income Trust Inc., pub. avail. February 8, 1991).
B. Municipal Lease Obligations
The generic comment letter discusses a letter sent to the
Institute, in which the staff modified its position with respect
to the liquidity of municipal lease securities. (See Memorandum
to SEC Rules Members No. 37-91, dated June 27, 1991).
C. Liquidity of IOs and POs
The staff has liberalized its previous position that
interest-only and principal-only fixed mortgage-backed securities
("IOs" and POs") should be deemed illiquid. The staff now takes
the position that the determination of whether a particular
government-issued IO or PO backed by fixed-rate mortgages is
liquid may be made under guidelines and standards established by
the board of directors. The staff states that such a security
may be deemed liquid if it can be disposed of promptly in the
ordinary course of business at a value reasonably close to that
used in the calculation of the NAV per share.
Amy B.R. Lancellotta
Associate General Counsel
Attachment